Continuing with 2022’s trend, there is a lack of positive excitement in the crypto market. While Bitcoin (BTC) and altcoins have remained stagnant to start 2023, there are a few reasons why volatility could spike in January.
Market caps during the 2022 holiday period. Source: Arcane Research
Winklevoss Letter to DCG stirs up bankruptcy FUD
On Jan. 2, Cameron Winklevoss, the co-founder of Gemini, penned an open letter to Digital Currency Group (DCG) founder, Barry Silbert demanding answers on the $900 million in locked customer funds. Gemini launched the “Earn” program in coordination with Barry Silbert and the $900 million in customer funds have been locked since Nov. 16 due to DCG liquidity issues. After the letter, crypto Twitter began generating FUD toward DCG, believing there to be liquidity issues akin to 3 Arrows Capital and FTX.
The financial strain the large Gemini hole could place on DCG is significant because they may be forced to sell sizable GBTC and ETHE positions, along with other positions in trusts run by their sister company Grayscale. According to Arcane Research, another path for DCG to meet debt obligations would be to initiate a Reg M.
Vetle Lunde, Senior Analyst at Arcane Research, noted:
“A Reg M would cause a massive arbitrage strategy of selling crypto spot versus buying Grayscale Trust shares. If this scenario plays out, crypto markets could face further downside.” Grayscale trust holdings of circulating supply. Source: Arcane Research
Fear is high and liquidity is low
The DCG and Gemini drama comes during a period in the market where sentiment is down. Despite evidence that investors plan to participate in crypto in 2023, the most market participants are not feeling bullish and are reluctant to engage with risk-assets. The index currently sits at 26 out of a 100-point scale which is the same as in December.
Fear and greed index. Source: Alternative.me
Such a high level of fear is even more significant during periods of low liquidity. Market activity continues to fall reaching volumes not witnessed before Binance introduced zero…